FDIC's 'Big One': Long Prelude Gave Way to a Sudden End

WASHINGTON — Alan H. Fishman had been the chief executive officer of Washington Mutual Inc. for just one day when federal regulators delivered a message: Raise significant capital or find a buyer — and hurry.

Just 17 days later, on Sept. 25, regulators shut the Seattle company's thrift and sold the banking operation to JPMorgan Chase & Co.

It was not just the largest failure in history. It was also extraordinarily quick and almost entirely painless from the government's point of view. Its collapse was caused by an old phenomenon — a bank run — that occurred in a new way, driven largely by Internet rumors out of the public eye.

From interviews with regulators, industry participants, and other sources, here is what happened as Wamu unraveled.

Early last month the Federal Deposit Insurance Corp. became more concerned about Wamu's viability. The FDIC began pushing the Office of Thrift Supervision to downgrade the company's supervisory rating. But that effort sparked a fight between the agencies, with the OTS arguing that Wamu's situation was stable, and that it was working to correct the situation.

The thrift agency was also concerned that lowering Wamu's Camels rating to 4 would automatically put the company on the problem bank list.

The names on that list are private, but the FDIC updates the total assets held by problem banks quarterly. Adding Wamu, with $307 billion of assets, to the list would be obvious to the analysts who scrutinize the data, the OTS feared.

As time went on, however, the OTS became less resistant to the idea.

"The OTS, as long as there was some reason for optimism, wanted to have the bank find ways to recapitalize themselves, to be a survivor," said William Longbrake, who stepped down as a Wamu vice chairman Sept. 1. However, "as time passes and there's bad headline after bad headline and people get nervous, at some point along the way you begin to lose the viability of the business as it is."

While regulators continued to debate the downgrade, they and the company were taking steps to try and avert a failure.

The OTS "thought that Wamu, if liquidity didn't become a problem, could make it on its own," said a source familiar with the situation. "The FDIC also was looking for a resolution that didn't require any direct government assistance."

The OTS entered a memorandum of understanding with Wamu on June 30, and Kerry Killinger, its longtime CEO, resigned.

On Sept. 16, Mr. Fishman flew to Washington for meetings with principals at the FDIC, the OTS, and the Federal Reserve Board. Two days later, Wamu's Camels rating officially dropped to 4, and it was put on the problem bank list.

"He got the messages: We're sorry, you have run out of time. You have to sell the bank," Mr. Longbrake said.

But it was already too late. By that time a run had begun, with deposit outflows eventually totaling $16.7 billion. A sale appeared to be the company's only option besides failure.

Regulators ordered Mr. Fishman to have a buyer lined up by Sept. 21. Wamu solicited bids from five companies: HSBC Holdings PLC, Citigroup Inc., Toronto-Dominion Bank, JPMorgan Chase, and Banco Santander Central Hispano SA. All five demanded a condition Wamu could not provide: government assistance.

"With the state of events today, potential acquirers were definitely" hoping to buy "the institution at a price that was lower than its market price … because of the possibility of shareholder lawsuits bogging things down," the source said.

Mr. Longbrake agreed that all of the bids "were contingent on FDIC intervention."

As of Sept. 21, regulators started taking things into their own hands. It quickly became clear that an open-bank sale was not viable.

"As the bank became illiquid" that hurt "the ability of an open-market buyer to take the holding company and assume all of the debt. … The open-bank transaction is much, much more expensive in the first place for the buyer," said Walter G. Moeling 4th, a lawyer at Powell Goldstein LLP.

Instead, the FDIC began soliciting bids for an auction Wednesday night. It was largely the same process the agency uses for every failed institution, but the stakes were higher. Wamu's collapse could have stuck the Deposit Insurance Fund with a huge tab.

By Tuesday, regulators were confident Wamu could be sold without cost to the government.

"With the massive withdrawals they had, the fear of a genuine meltdown undoubtedly convinced OTS they couldn't wait any longer," Mr. Moeling said.

The FDIC received four bids — some of which were for pieces of Wamu, not the whole institution.

JPMorgan Chase's bid, however, was the best.

It agreed to assume all the thrift's assets and deposits and pay a premium of $1.9 billion — large enough so that the FDIC would not have to tap into the Deposit Insurance Fund. In return, JPMorgan Chase would have no obligation to holders of Wamu's debt and preferred stock.

There was one other wrinkle.

In a conference call with reporters Thursday night, FDIC Chairman Sheila Bair said Wamu's closure was originally planned for one day later, a Friday, the day of the week the agency typically closes institutions.

However, "press leaks" convinced the regulators that rumors before the failure was announced could confuse and unnerve depositors, Ms. Bair said, so the closure was accelerated by a day.

She said that in the end, the transaction proved to be a positive, because the complex thrift company — on radar screens for months because of its deteriorating loan portfolio — failed without any depositor loss or systemic fallout that typically is a concern in a large failure.

"This is the big one that everyone was worried about," Ms. Bair said on the call.

So far, so good. The FDIC said it had no evidence Friday of any depositor runs.